Suddenly nervous of investing in shares. Do some people not do it and only trust cash

ZiggerZagger

I have been to see an IFA as I have a number of financial issues (divorce, pension issues, mortgage). I work FT.


I potentially have £200k that can be invested. When the divorce is finalised, I will have a mortgage of £240k. Those 2 situations need to be separated for 2 years (i.e. that £200k can't be used to pay off that mortgage for 2 years).


I went to see an IFA to see what my options were. I had 3 options (pension not an option)


1. Buy a property (but with potentially not a great return in my area/neighbouring areas)
2. Leave the £200k in cash accounts for 2 years (poor returns but at least the capital is safe) then use it to pay off the mortgage at that point
3. Put some of it in shares - with the potential of leaving it for at least 5 years (2 years is too short for shares). Assume I am still working FT therefore the mortgage can carry on until a point where I need to pay it off, in which case I liquidate the investments or I just carry on paying off the mortgage till it ends (15 years) and keep the investments.


The IFA said they never recommend property. He has recommended I leave at least 25% in cash/bonds and put 75% in shares. I can vary those percentages depending on the risk profile I want to take (the higher the shares %, the higher the risk). I think eventually I will look at 40/60.


However, I have suddenly got the wibbles about putting that much money away. There is no rationality behind my wibbles. I understand the numbers, I understand the returns.


Do some people never invest in shares and only leave their money in cash? I have always invested small amounts in shares (within the ISAs) and done well but this just seems like a far bigger amount!

Radiantsoul

It sounds like you might be better off holding a higher percentage in cash/bonds than 25-40%. Your nervousness may be a sign you don't want to risk you capital which may very well be completely rational!

ZiggerZagger

yes that might be it . The shares are funds rather than straight shares but of course, like all investments, they don't come without risk. Maybe I should think of varying that percentage so that at least I am assured of part of it not eroding!


I think what is worrying me is the potential for me to lose my job and needing to liquidate the investments earlier than 5 years. I don't like the idea of shares only for 2 years as you have a good chance of not getting the returns you want.

Linton

ZiggerZagger wrote: »

...........
I think what is worrying me is the potential for me to lose my job and needing to liquidate the investments earlier than 5 years. I don't like the idea of shares only for 2 years as you have a good chance of not getting the returns you want.

In that case keep what you would need to cover you for say 6 months if you were made redundant as cash, which surely wont be £200K, and invest the rest. OK inflation is low right now but could easily increase as and when the world economies recover. Inflation will guarantee you lose wealth from a cash pot.

dunstonh

1. Buy a property (but with potentially not a great return in my area/neighbouring areas)

And can you trust the tenants, the agents or anyone else involved?

2. Leave the £200k in cash accounts for 2 years (poor returns but at least the capital is safe) then use it to pay off the mortgage at that point

Its only safe if you beat inflation.

3. Put some of it in shares - with the potential of leaving it for at least 5 years (2 years is too short for shares). Assume I am still working FT therefore the mortgage can carry on until a point where I need to pay it off, in which case I liquidate the investments or I just carry on paying off the mortgage till it ends (15 years) and keep the investments.

That is a big jump from considering cash at one end to considering shares a the other. What about all the options in between? (such as investment funds with an asset spread which includes shares but also bonds and property)

However, I have suddenly got the wibbles about putting that much money away. There is no rationality behind my wibbles. I understand the numbers, I understand the returns.

What are this wibbles?

Do some people never invest in shares and only leave their money in cash?

Yes there are. And they would have ended up with less because of it.

I have always invested small amounts in shares (within the ISAs) and done well but this just seems like a far bigger amount!

Shares and funds are different. Funds of shares in them are generically lower risk than individual shares due to diversification. However, a multi-asset spread would be even lower risk risk than shares .

I think what is worrying me is the potential for me to lose my job and needing to liquidate the investments earlier than 5 years.

Modern investments are open ended and have no tie in. The 5 year term is considered a minimum ideal period you should hold on to them but you are not contracted to hold on to them for that time.

Is job loss on the cards?
How much emergency fund in cash will you be holding back? (6 months, 12 months??)

Malthusian

The default option is always to pay off the mortgage and get a risk-free, tax-free return equivalent to the interest rate minus any early repayment charges. You don't say what this is but often it is pretty attractive compared to equity investment, unless you have a very good mortgage deal. The return would be diminished by having to hold funds in cash for two years but it would still be the default option.

After all, if you were mortgage-free at this point you would be unlikely to go and borrow £200,000 to invest in the stockmarket.

Incidentally, saying "25% in bonds/cash and 75% in shares" is a bit odd, the question should be how much you would have in cash and how much in bonds/shares. Bonds are just as capable of plummeting in value (temporarily) as shares, as we saw most recently in 2009.

racing_blue

Over 109 different 5 year periods (1899-2013):

in 81 periods, shares performed better than cash
in 28 periods, shares performed worse than cash

Source: http://www.moneywise.co.uk/investing/first-time-investor/cash-versus-equities-performance which references a Barclays report.

Accepting that there are periods - of several years - when the value will fall is part and parcel of investing in shares.

ZiggerZagger

it would be a multi-asset spread - the % that I have called 'shares' is the % in equity funds (i.e. not bonds, cash, other asset funds etc.)


there is no tie-in, you are right


job loss - hard to predict. I'm not in a big company with a lot of job security. I work for an owner managed company with its paws in emerging markets - though it is a good job, I don't think, in my line of work, you can ever rule out the possibility of losing your job (biggest possibility is being taken over by another company and them parachuting in their own senior management team).


In my mind, 6 months is adequate and I have already made provision for that outside of this. My bigger concern is not the day to day costs but the chance of not getting another job that pays like this one. Two of my friends lost their jobs last year and have still not found anything. I would need to take another role but to be able to do that, would have to downscale my salary if I wanted something quickly (I have children, other financial responsibilities and I bear the costs of all of this on my own with no other contributions from anyone else).

kidmugsy

Is your aim to pay off most of the mortgage in two years time? If so, put the maximum you can into interest-bearing current accounts, and probably put the rest into accounts at, say, ns&i. Including a Cash ISA.

Or is it to let the mortgage run on for 15 years? In which case you could combine cash in interest-bearing current accounts with investments chosen to do well (you hope) over a decade and a half. Be sure to reinvest the dividends.

Or, start along the first line but if/when there is next a big stock market decline, invest then. This strategy is called "market timing" and the conventional wisdom disapproves of it. It would call for someone to overcome their "wibbles" just when everything seems gloomy. Could you do that?

Anyway, after the huge swings in the bond market over the last few days, I must admit that we are "wibbling" about making an equity investment at the moment too.

racing_blue

50 % cash (or maybe bonds), 50% shares, annually rebalanced, is a simple strategy for someone who is worried by both sides of the coin.

The cash limits overall losses in a down market, while the shares bring the special juice and some protection against inflation.

25% cash, 25 % bonds, 25% gold, 25% shares is another strategy

ZiggerZagger

mortgage is 0.99%. I can't pay it off for 2 years.